We talk about bankruptcies as a way to get a fresh start. You can wipe the slate clean and begin all over again. For the most part this is true, but there is one long-term impact of bankruptcy you should be aware of. Filing for bankruptcy will negatively impact your credit score, and that negative impact could last for a decade.
Credit Score vs. Credit Report
Each time you apply for credit — fill out a loan application, open a credit card, etc. — the lender pulls your credit report in order to check your credit score.
A credit report is like a financial report card, but instead of A’s, B’s, and C’s, the report lists detailed information about your past use of credit. It will include information on:
- The number of credit accounts you have, and how long you have had them.
- The types of accounts you have (bank accounts, credit cards, car loans, mortgages, etc.)
- The amount of money you owe compared to your credit limits — this is known as credit utilization.
- Whether you have applied for credit recently (Creditors want to know if you are going on a spending spree).
- Your repayment history.
That information is then collapsed into a credit score, sort of like a child’s grades become their GPA.
Your credit score is numeric. Scores range from 300 to 850, with the highest scores being the best. In general, the higher your credit score, the easier it is to get a loan, a new credit card, or what have you because lenders use the score to judge your credit worthiness.
How Does A Bankruptcy Impact Your Credit Score?
Filing for bankruptcy can have a long-lasting, negative impact on your credit score. As noted above, your repayment history is one of the factors that determines your credit score. If you file for bankruptcy your credit report will note that filing, and report on how it impacted your repayment history.
In the short-term this isn’t much of a concern because if you are filing for bankruptcy your credit score is likely pretty low already. Most people do not file for bankruptcy without going through significant financial trouble, and that is going to show up in your credit report.
What makes filing bankruptcy a concern is the long-term impact. Your credit report may contain information about your bankruptcy for a decade. So even if filing for bankruptcy helps get you back on track financially, and you develop good financial habits that would otherwise raise your credit score, your bankruptcy from years ago could drag your score down.
Don’t Let Your Credit Score Hold You Back
Concerns about your credit score should not keep you from filing for bankruptcy if you need financial relief. It is merely something to be aware of so you can be prepared for your post-bankruptcy life.
Developing good financial habits will raise your credit score over time, even if you have filed for bankruptcy in the past. And, that bankruptcy is only going to show up on your credit report for 10 years or so.
If you have questions about the pros and cons of filing for bankruptcy, the Padgett & Robertson team is here for you. Please contact us today to schedule an initial consultation.